Rover gets £100m from state to avoid pre-election collapse

The Government has offered MG Rover an emergency loan of more than £100m to prevent the car maker collapsing before the election and causing thousands of job losses in marginal West Midlands constituencies.

The Government has offered MG Rover an emergency loan of more than £100m to prevent the car maker collapsing before the election and causing thousands of job losses in marginal West Midlands constituencies.

The loan is conditional on the four businessmen who own MG Rover putting up several million pounds of their own money to keep the ailing car maker alive. The four have made an estimated £40m from the loss-making company since they bought it from BMW five years ago for a symbolic £10.

MG Rover has been attempting to secure a rescue deal with the Chinese car maker Shanghai Automotive Industry Corporation for the past six months but the talks appear to have stalled.

With the backing of the Prime Minister and the Chancellor, the Trade and Industry Secretary Patricia Hewitt yesterday dispatched a team of senior officials to Shanghai in an attempt to break the deadlock and clinch a deal.

Negotiations with the Chinese are due to take place over this weekend. Government sources warned last night that there was now a possibility of SAIC pulling out of the rescue, adding that the talks in Shanghai could prove "crucial".

Officials refused to comment but there are fears that MG Rover will run out of money in the next four weeks unless a deal with SAIC is done or emergency funds are pumped in by the Government. One government source said the closure of MG Rover would deal a "devastating blow" to the local economy.

The firm's Longbridge plant in Birmingham employs around 6,000 workers but three times that number of jobs are dependent on it in the wider West Midlands economy. The surrounding area contains a number of key Labour marginals.

Officials stressed that the £100m would be a bridging loan, which would last for "a few months" and would need to be repaid by MG Rover and the Chinese if they succeed in reaching agreement. The money is in addition to the £40m deferral of VAT payments which Customs and Excise has granted MG Rover to ease its cash flow crisis.

SAIC has already injected £67m into MG Rover and is proposing to invest a further £133m. In return it would take a controlling 75 per cent stake in the joint venture between the two companies. If the talks cannot be revived, then ministers are ready to help MG Rover seek a new partner, although officials admitted that the prospects of that succeeding were "bleak".

In the event that the company does collapse, contingency plans are being put in place to limit the impact on the local economy. Schemes offering retraining to workers and help to set up new businesses are among the package of measures being drawn up with local enterprise agencies.

Even if a deal can be struck with SAIC, there will still be at least 2,000 job losses at MG Rover, with the production of engines switching from Longbridge to Shanghai.

Direct government aid for ailing private companies is extremely rare. The previous time a company was helped in this way was when the Government provided the nuclear power company British Energy with a £250m emergency loan in 2002 to avert insolvency. The loan was justified on the grounds that the Government had a duty to safeguard the company's nuclear reactors and protect security of supply. The aid was approved by Brussels and Whitehall sources said they were confident the loan to MG Rover would also comply with EU state aid rules.